Monday, September 21, 2009

The problem with the economy: you aren’t needed any more

Roughly speaking the world's economy has always worked as a giant pass-along-game between the planet’s citizens. Person A needed stuff from person B and person B needed stuff from person C and person C needed stuff from person A. So everyone needed everybody. It has been a kind of giant circle of needs.

But as a smaller and smaller number of people are needed to make the basic things that people need for survival, from food to energy, to clothing and housing, the less likely it is that some people will be needed at all.

When you read in the press the oft-quoted concept that “those jobs aren’t coming back” this “reduction of need” is what underlies all of it. Technology has reduced the need for labor. And the labor that *is* needed can’t be done in more developed nations because there are people elsewhere who will happily provide that labor less expensively.

In the long term, technology is almost certainly the solution to the problem. When we create devices that individuals will be able to own that will be able to produce everything that we need, the solution will be at hand. This is *not* science fiction. We are starting to see that happen with energy with things like rooftop solar panels and less expensive wind turbines. We are nowhere near where we need to be, but it is obvious that eventually everyone will be able to produce his or her own energy.

The same will be true for clothing, where personal devices will be able to make our clothing in our homes on demand. Food will be commoditized in a similar way, making it possible to have the basic necessities of life with a few low cost source materials.

The problem is that we are in this awful in-between phase of our planets productivity curve. Technology has vastly reduced the number of workers and resources that are required to make what the planet needs. This means that a small number of people, the people in control of the creation of goods, get the benefit of the increased productivity. When we get to the end of this curve and everyone can, in essence, be their own manufacturer, things will be good again. But until we can ride this curve to its natural stopping point, there will be much suffering, as the jobs that technology kills are not replaced.

The political implications of this are staggering. Clearly, more and more jobs will move from more developed nations to countries like China, and it is difficult to see how, as this process continues, the United States retains its leadership position. In fact, it seems entirely possible that the U.S. will exchange places with less well-developed nations. Yes, there will certainly be fabulously wealthy people in the US, because many US companies will own these highly productive businesses. Unfortunately, that wealth will be held by a very small number of people. And their operations will need to employ very few people.

In short you will have a few very wealthy folks, and a much larger majority that will just not be needed for the most important things that the country needs to do.

I don’t know what the short-term solution to this problem is. In fact, I fear there may not be one. But it is clear that what I am describing has already started and there is little we can do to stop it. GDP will increase as demand for labor **decreases**! How is that for the ultimate economist's oxymoron?

27 comments:

Very insightful post. And just to emphasize- the idea that there will be some "fabulously wealthy people in the US" in no way contradicts your prediction of the U.S. possibly exchanging places with less well-developed nations. That distribution (a few ultra-rich, a whole lot of poor and nothing in between) has been very typical of undeveloped nations and is not anything to strive for. There is nothing wrong with making wealth possible in the nation (it does encourage risk taking and innovation)- but creating the platform to support a wealthy class is in no way sufficient to support a vibrant middle-class.

You are being diplomatic in your writing but I will be blunt.For the U.S population this how things will look going forward:-If you are extremely talented in what you do wether you are an artist/writer/doctor/engineer etc you have work to do and will be sustainable.If you are an entrepreneur and have something of value you may be sustainable.If you are unskilled/lowskilled worker like a waiter/gast station attendant/fruit picker/baby sitter you are sustainable.For the rest of society that falls in the middle with soft skills being middle managers in a multitude of industries pushing papers/emails/text etc you have a race to the bottom.Why bottom you ask? Cuz if you were talented you would be already at the top or you would be an entrepreneur.WHY IS THIS GOING TO HAPPEN? Cuz technology replaces many of the job functions and or someone elsewhere can do it better and cheaper than you can do it here.What does this mean overall for the U.S.? Overall there is more downward pressure on wages and thereby bring down prices of housing which has historically been going up for that last 100 years. For the first time the U.S. Population will see significant decreases in home equity and a tectonic adjustment that will not be accepted graciously.People will have to recalibrate their Net Value and accept that or else ...

Umm, Hank, have you ever considered that Nature may resolve this issue for us in the near future helped along by say Baxter bio-warfare. I cannot help but ponder the probability that useless eaters whose socio-economic profile is not quite right will be helped along to the grave. I guess we have to wait and see if Swine Flu does the job or if we need those mandantory injections of squaline instead.

Do you have any evidence that technology reduces the demand for labor? Because in my reading of economic theory, productivity increases reduce the effective cost of labor. And usually when costs for a certain good or service are reduced, demand increases.

This has been shown over and over and over, from mechanized looms in the industrial revolution to the computer revolution. Your concern about technology obviating the need for labor has been repeated for hundreds of years, and it just never works out that way.

History is of little guide here because we really are just hitting the knee in the curve. Economic theories from the 20th century, before even the internet existed, may not apply. Imagine for example that things progress as they have been, to a seemingly ridiculous extreme. Imagine that 100 people produce everything the planet needs. Would that be likely to increase or decrease the worlds level of employment? If you agree that it would decrease employment, then the only thing we need to do is plot the curve between here and there.

It's only an oxymoron if you read the toxic morons whom the Establishment pass for "economists".

But if you understand the difference between Utility and Value, you see that the very definition of Progress is more Utility for less Value.http://www.econlib.org/library/Bastiat/basHar5.html

And then you'll understand that the demand for human labor is infinite. Maybe you'll need more massage therapists or restaurant chefs and fewer assembly line workers or rice farmers, but who's to complain about that?

The problem is that if there are only (to take the extreme) a few thousand people making most of the money, they wont need enough massage therapists and personal chefs to employ the other few hundred million. The point is person to person services will not fill the gap if the baseline wealth is not sufficiently spread.

This post seems almost like an excuse to not act or think: we are all doomed to be not needed as producers of material goods, so why bother providing any value? Not all value is provided by the production of materials goods. You, being a computer programmer, should know that more than any other professional.

Hank you're raising an interesting and astute point here. From a purely economic perspective, as technology and innovation increase, economically we ALL should be be richer. The same technology and innovation that makes some jobs unnecessary, enables everyone to buy / get more with less input (i.e we're all richer). Whats interesting, as you're pointing out, though, is that it appears that this hasn't been the case for the vast majority of people in the last decade (or at least the gains haven't been distributed very evenly).

Its something i've thought a lot about, and my theory is that we have all been getting richer (particularly in terms of the technology, food, clothes, etc... we can all buy for less money) however much of the increase in our purchasing power has been eroded by manipulation of the money supply. So if in theory we should have seen on average a 30% (just using this as an example) deflationary change over the last 10 years (i.e. each of us can buy 30% more stuff with our existing salaries) instead we've seen a 30% inflationary change (we each can buy 30% less). That 60% net change then gets transferred from the everyday money holding american public to large banks and debt issuers that have first access to borrow money from the government at a subsidized rate.

What this means is that the problem isn't that we're in the "in-between" phase, its that the the "in-between" phase only has a certain capacity to overcome harmful external forces. At some point you are absolutely right, the strength of technology based deflation will push the cost of all production to $0 (hello Star Trek) and currency will likely be irrelevant. We're obviously some time off from this though, and until that happens it would be nice if everyone shared fully in the gains that technology and innovation bring to the world.

Hank, you conveyed an amazing amount of information in so few paragraphs, great article.

As I've long told friends, don't think for a second that the former and current elite's of this world, especially those who come from "royal" lineage, wouldn't like to return to the ways of old where they owned and ruled all the lands, and the rest of us just were serfs.

And as you pointed out to Fare, they won't need the other millions and billions of former employees. And they also won't want the hassle of listening to them either, so they have to go.

Strange timing of how your short article fits like a glove with this longer recent article:

The fact is technology, throughout history, has increased the number of jobs, not diminished them. Further, the new jobs created are often higher paying jobs. ATMs, for instance, do away with bank tellers, but then we need people to make and maintain the ATMs.

I wrote about this trade off several months ago (http://mikecs.net/prodigeek/2009/01/05/theres-another-side-to-jobs-lost-new-jobs/). I linked to a Slate article listing the dozens of industries put out of business by new technology over the last century. Yet instead of declining jobs and growth, the last century has been one of prosperity.

Technology helps make us a more efficient society, allowing fewer people to do one task and devote time to another. The U.S. used to employ the vast majority of its citizens in food production, but now less than one percent of our GDP comes from agriculture yet we produce more food than before. All those people once focused on growing and harvesting food went on to build new industries like movies, air transportation, computers, and the internet.

Speaking of the internet, how did that Dot Com Boom go? A massive increase in job creation in an all new industry not seen before. Yes there was a crash, millions of jobs lost. And you know what? We recovered and built sustainable jobs in that same all new industry.

Of course, it would help to look at where the jobs are actually being lost. The financial industry hasn’t lost more than 300,000 jobs because of better technology, but rather unregulated greed, corruption, and bad investments. The mortgage and construction industries have lots hundreds and thousands of jobs because of more than a decade of over investment and now a large drop in people not wanted to buy new houses.

The jobs lost are not just low-skilled or low-income jobs. This economic crash is the result of many, many issues including many industries not adapting to new technology rather than simply being made obsolete (see the auto and newspaper industries). After the end of this recession, the U.S. and most other countries will have re-prioritized their resources, both in terms of dollars and labor. Maybe more people will be available to research and build a massive green technology industry. How about turning stem-cells into a viable business? What haven’t I thought of? Who would have thought 10 years ago that writing 140 characters would be a billion dollar business? By removing some jobs, we free up resources, both people and dollars, to do more in other places.

I agree...which is why after twenty years as a successful Realtor I've turned to writing murder mysteries set in the real estate community instead of selling houses. Good murders will always be needed.Nancy Lynn Jarvis author ofThe Death Contingency and Backyard Bones

I think you raise a very valid point. Although many commenters pointed out that technology creates new industries and new jobs, this does not necessarily get spread out evenly: there are millions in the developed countries, who are falling out of the labor force, not only because they're not skilled enough, but also because the job market simply does not need them. Deindustrialization of industrialized countries reduces the total demand on labor. Even as the economy as a whole gets more prosperous due to technological progress.

In Europe, where social emergency nets, such as unemployment benefits, are more common and widespread than the US, there is serious debate about how to solve this very problem. In Germany, where I live, every unemployed person gets at least 450 EUR cash ( about $650) every month from the state. This is not much, but with some additional social benefits like child support, rent support, etc., it is enough to encourage many people to accept this low income, and stop seeking jobs not to lose these benefits. In addition to reducing the economy's productivity, such a situation practically dooms these people to permanent low income by cutting them off from the labor markets.

One possible solution to this problem currently being discussed is to pay every single person a minimum subsistence wage, regardless of their current income or employment status. This ensures that everybody has their basic needs such as food and shelter taken care of, and everything productive they do comes back to them as additional income. This way nobody is forced to sell they labor for small wages, highly skilled professionals and entrepreneurs can still make lots of money, and mediocre artists do not starve. The big question is, if we have reached the point where the productivity is large enough, where the economy of a developed country can sustain such a system...

An interesting topic, and one that I have spent allot of time thinking about myself. I used to hold the belief as well that increases in productivity surely would bring about the scenario you mention, where a very small class of producers reap the benefits of these gains and the masses are left without work, replaced by robots or some other form of uber efficient system.

I think that this position is missing one critical point. Just as we, as a society, tend to increase (not decrease) our consumption of physical and digital goods when technology advances, so to it appears that we increase our demand for labor (as aluded to by Michael above).

A more elegant explanation of this effect is given by Ray Kurzweil, http://www.adambreckler.com/technology-consuption-scale-price

Don't forget also, that the harnessing of technology is the greatest enabler of upward mobility throughout socio-economic history, so it is not as if we are doomed to a future of technologically driven serfdom.

You might consider the situation from the wealth side of the equation. The law of supply and demand applies to capital, as well as capitalism. The only way to invest money is to loan it to someone else, so not only do those controlling the means of production need a customer base to that can afford to buy their products, but they need an economy broad enough to be able to absorb the wealth they accumulate. Otherwise we just have a credit bubble, as the financial sector manufactures artificial demand for capital, both through unsustainable demand and excess circulation. When it pops, the wealth is lost. Order may be top down, but growth is bottom up and the top can only be as large as the foundation on which it rests can support.

Engin Kurutepe, are you for real? Seriously, pay everybody in the economy a wage for doing nothing at all? Where are you going to get that money from? Wow.

On a more serious note, Hank, like others have said time and time again since the existence of homosapiens had roam the earth, technology makes us better off and NOT worse off, your thesis is flawed by confirmed data collected in human existence. And the reasons for the explosion of the growth of the world population is because of technological innovations which gives us the free time to procreate and cheap abundant energy.

Eventually, the cheap energy part will end as we can see now and we have an over populated planet of people just hanging out with much ado about nothing...which will lead to revolution/social unrest. The problem we face with unemployment is not due to technological advancement but rather human behaviour, i.e. greed, corruption, ego, skullduggery, a having 18 kids in 1 household, etc.

When a vending machine is placed in a hallway to replace a human to stand behind the counter to perform a mundane and repetitive task, it is not taking jobs away but rather shifting the demand for labour from one area to another. Technoligical innovations actually create jobs and increase GDP for an economy. Instead of having 1 douchebag stand behind the counter to collect the money and stock the bags of chips, you have created more jobs by buying the glass, metal, computer chips, etc.

"The problem is that we are in this awful in-between phase of our planets productivity curve."

Yeah. They call that reality. Being a tech guy from our era, you certainly believe that EVERYTHING is solvable. But there are somethings that aren't. There are real limits to things in our finite world.

Tech solutions also don't account for scenarios where you have multiple disasters occuring at the same time. That's what is going on right now.

You can't just dial up spectacular technology when you want it. You can't just wish the economy into full speed ahead mode by telling people to "go for it". If trust has vanished from the "system", you have a problem that is not solved by technology.

Trust and its restoration must be earned the old fashion way, and that takes time. Time we don't have.

The ultimate resource is human time. And it's also the thing that's the most spread out there. Moreover, historically, the relative value of human capital vs capital in "natural resources" has only soared -- that goes hand in hand with technical progress.

The richest man in the world can do nothing with his riches least he spends his wealth, and there will be no one to work for him if he doesn't make it worth their while, including their in turn being able to use their salary usefully, etc. And your tycoon can only enjoy so many wives or private jets at once.

Were are your numbers? Is the relative fortune of Bill Gates and a house cleaner bigger than the relative fortune of the King of England and an agricultural serf a few centuries ago? I don't think so.

If anything, it is the constant political robbery justified by socialist arguments such as yours (in this case at least) that makes a few very rich to the detriment of the masses.

As for the decline of the US, sure - but the US still has an asset that makes it a much safer place to invest than China: relative respect for private property and common law.

What brought me here: I'm looking for some ideas about what money, exchange, and markets might look like in the laborless production scenario....

As I understand it, Marxist economic theory, (O.K. as far as classical economics go), is particularly weak in the area of value theory, where Marx turns to the old-fashioned labor theory of value, (where labor produces value). (I guess "marginal use" theory is the more workable approach...?) On top of that, Marx fails to anticipate the shift from production- to consumer-oriented economies, (e.g., the growing importance of "massage therapists"--i.e., the service sector--based not on boosting productivity per se but on augmenting our individual rates of consumption).

I imagine material scarcity may still exist in this laborless condition: Extraction may be labor-free, but access to heavier, more exotic elements may still pose technical difficulties, at least relative to ubiquitous elements, (like hydrocarbons). So does this result in some medium of exchange governed by marginal use value of raw materials? (I'm not an economist--please do correct this potentially nonsensical string of economic terms! :)

So, perhaps we're in a situation where it's virtually free to live, but costs something to "capitalize" on exotic materials, (basically, works of art and nuclear reactors)? Or do these costs somehow trickle down to the (non-productive) consumer? Does this get anyone's wheels turning? --MKM

P.S. The bigger problem, of course--I don't mean to ignore it--is what meaningful human activity remains should technology obviate labor...which happens to be the other big hole in Marxist thought: Marx claims politics are driven exclusively by economics. I think that's just a gigantic failure of imagination, but if it were the case, (or if people believed it to be the case), no political structures would be possible in a "post-economic" society. As we've seen in the 20th century, not a desireable state of affairs!

And sorry about picking on Marx--I know there have been developments in economic theory since Marx--but like I said, it's O.K. as far as it goes! AFAIC, Marx is just some basic economic thought, left/right ideological nonsense notwithstanding.

Interesting article. This is about scarcity/abundance. Nobody really cares if they have a job or not, they really care that they are finding it harder to procure what they need/want. Thereasons for this are: Usuary/ false force-backed authority and central banking. Once they are gone, and they will be soon, We will all have more than we need of everything we could desire.

I apologize for weighing in on this so long after it was written but I wanted you to know I definitely understand from where you are coming.

I was involved with Intranet development back in 1995 before anybody even used the term "Intranet." Working for a large midrange channel partner I commented to the VP of my unit that part of my job was putting people out of work. I was identifying manual processes within our sales organization to automate and while we often found places to transfer no longer needed employees, the fact remained that technology was making people less necessary in our organization.

Coming across this interesting post, I can see both sides of the argumentative coin.

Yes, advancing technology makes certain jobs irrelevant or unnecessary. While at the same time, it opens new employment opportunities in demand because of the technological shift.

However, what I did not see mentioned (which strengthens Hank's point) is that like it or not, not all people are equally skilled and gifted. Technology and times may change quickly, human nature evolves at a crawling pace.

The new windows of opportunity are open to those with higher skill levels of creativity and intelligence. Creatively gleaning information/ideas, packaging/manipulating, marketing, and monetizing it will be the epitome of the generations in the near-future. Information (and how it is acquired, disseminated, and utilized) will be the top commodity.

Not too long ago, if a student dropped out of school with a basic education, he/she could find a meaningful livelihood doing tasks that required human energy and low-tech skills. Now, as everyone admits, the majority of these jobs are outsourced.

This former student of long ago had to compete with a handful of other applicants for a job because proximal geography served as a limiting factor. This worked to his/her advantage.

Now with the geographical barriers removed, that same applicant (if in today's world)could be a drop in the savagely, competitive bucket of resumes.

What significant, remarkable skills does this person have? Sure, he/she could try to learn new, cutting-edge skills, but as an educator I can affirm that not all individuals have the same aptitude level. Regardless of educational reforms, children will "be left behind". We are creating the future, one day at a time.

Hard questions will need answered. What becomes of some people? Don't they have inherent worth? Why are we teaching 20th century skills in the 21st century? Putting students' hands on a mouse is not enough.

What Mr. Williams sees as the Present with a vision of the Future, I see this as the END result much like the movie Wall-E .

When machines and automation in place, you take away the soul purpose in life, That of being Worthy ! When this happens, human life fails to take responsibility for it's actions ( not to say that we don't already), our needs outgrow our wants, so to speak.

Older, highly skilled people are being forced to retire in corporations all over America in most cases a good ten years before they can collect Social Security. My job died after 9/11 and as a middle aged person I am not wanted hardly anywhere. I think if we don't learn how to develop our entrepreneurial skills, we are in big trouble. Find a niche we can fill and go for it. I plan to have an estore open by the end of the year.

About me

My name is Hank Williams. I have spent all of my professional career making products, including Clickradio, an early Internet music service, and DayMaker, one of the first personal information managers (address book, scheduling, task, notes, etc.) for the Mac.

I am now working on a new data and web development platform that will change humanity as we know it! This is my soap box.